In underground caves, US oil reserves may be used to counter rising energy prices

With rising gasoline prices and inflationary pressures in recent weeks, calls have been mounting in Congress for the Biden administration to take advantage of the country’s Strategic Petroleum Reserve.

As Senate Majority Leader Chuck Schumer joined those calls in the middle of the month, Schumer said at a press conference, “We need immediate price cuts at gas stations, and the place to look is the Strategic Petroleum Reserve.”

As for Energy Minister Jennifer Granholm, she said that such a measure is one of the measures the US administration is considering to calm its energy markets, in addition to urging Saudi Arabia and other foreign producers to increase oil production.

People who support such a measure said selling from reserves at oil prices above $80 a barrel would not only increase supplies and reduce prices at gas stations, but would also generate billions of dollars in revenue for the federal government.

Senate Majority Leader Chuck Schumer: “We need an immediate price cut at the gas stations, and the place to look is the Strategic Petroleum Reserve.”

What is the strategic oil reserve?

The Strategic Petroleum Reserve holds the world’s largest emergency supplies, storing approximately 620 million barrels of various grades of crude in underground caverns at 4 locations in Texas and Louisiana. They are caves capable of meeting the country’s consumer needs for about a month in the event that all imports and local production stop.

It was used after the oil embargo imposed by Arab members of the Organization of Petroleum Exporting Countries (OPEC) in 1973-1974, and in a few emergencies, including mobilization for the Gulf War in 1991 and the aftermath of Hurricane Katrina in 2005, when it damaged A significant part of the oil infrastructure of the Gulf of Mexico.

Oftentimes, the reserves were used to exchange oil or loaned to refineries when ships’ channels were out of order due to barge accidents or storms.

What is the argument for using this oil?

With the global economy and shipping lanes hit by a pandemic, the United States is facing inflationary pressures the country hasn’t seen in decades. Now that the United States is a major oil producer, it does not need to keep reserves as full as it did in the days when the country was more dependent on foreign oil.

In a letter sent by 11 Democratic senators to President Joe Biden in early November, “the rise in gasoline prices has placed an undue burden on families and small businesses trying to make ends meet,” and the letter said: “It has been proven that Particularly stressful as our voters continue to recover from the economic fallout from the COVID-19 pandemic.”

The opening of the reserve would re-calibrate the equation of supply and demand, relieving the shortage of the oil market. Even a temporary reduction in the domestic prices of oil, gasoline, and diesel would ease inflationary pressures on food and other trucked goods across the country.

With oil prices more than doubled since the economic crash that accompanied the most severe months of the epidemic, the average price of a gallon of regular gasoline in the United States has risen to $3.42 (roughly mid-November) from $2.13 a year ago, according to AAA. (AAA).

It is noteworthy that supplies worldwide are deficient because OPEC members kept production cover in order to support prices. US producers have also been cautious, in part because investors are telling them to focus on reducing debt and increasing dividends rather than increasing production just to flood the market and drive prices down again.

What is the argument against exploiting the reserve then?

Use of the reserve should be reserved for real emergencies. The reserve was created and designed to handle emergency disturbances caused by wars and storms, not periodic price increases at gas stations. When supplies are scarce, prices naturally rise, and firms usually respond by producing more to at least eventually solve the price problem.

Now that the United States has become a major oil producer, it does not need to keep the entire reserve as it did in the days when the country was more dependent on foreign oil.

Will the use of the reserve be effective?

Most experts believe that using the reserve will lower prices modestly, at least for a short time.

The price depends on how much of the reserve will be used and whether such a measure is coordinated with allied countries such as Japan and Germany who can also release the reserves. The use of 30 million barrels, for example, will have no more than a temporary effect because oil prices are set globally and average global consumption is about 100 million barrels per day.

“Using the reserves, which are mostly stored in the form of crude oil and not oil products like gasoline, would provide some relief for gasoline prices,” said Louise Dixon, chief oil markets analyst at Rystad Energy, a consultancy. But the impact is likely to be moderate and short-lived.”

Will use reduce home heating prices?

Perhaps in some places, but most homes use electricity or natural gas for heating, about 5 million homes still use heating oil, most of them in the Northeast.

The release of the strategic reserve could help modestly, but any impact would have to wait until late in the winter for the oil to be processed by refineries and then shipped.

© New York Times Foundation 2021
It was transferred to Al-Arabiya, “Al-Jazeera’s Leadership” page.

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